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"In the video, Davidson said he immediately knew Buffett was something special - he knew all about GEICO and asked exactly the right questions."

"We had the most benign hurricane season imaginable last year. When hurricanes occur, we'll pay out a lot of money. We hope over time to more or less break even on our underwriting. When you see last year's profit, look at it as an offset to future losses."

I have never seen anything as automated as that Iscar operation. I think they view it as a disgrace if any human hand has to do anything."

What has caused this extreme record to go on for such a long time? I would argue that it started with a young man reading everything when he was 10 years old, becoming a learning machine. He started this long run early. Had he not been learning all this time, our record would be a mere shadow of what it is. And he's actually improved since he passed the age at which most other people retire. Most people don't even try this - it takes practice. So it's been a long run, with extraordinarily concentrated power by a man who is a ferocious learner. Our system ought to be more copied than it is. The system of passing power from one old codger to another is not necessarily the right system at all.

Many people are very smart, but are not wired to think about things that haven't happened before.

We're not looking for someone to teach - we're looking for someone who knows how to do it.

Anything times zero is zero and I don't care how good the record is in every other year if one year there's a zero. We're looking for someone who is wired in such a way as to see risks that haven't occurred and be cognizant of risks that have occurred. Charlie and I have seen guys go broke or close to it because 99 of 100 of their decisions were good, but the 100th did them in.

Munger: It reminds me of the young guy who went up to Mozart and said, "I'd like to write symphonies." When Mozart said, "You're too young," the young man replied, "But you were young when you started." Mozart pointed out, "Yes, but I wasn't asking anyone else for advice on how to do it."

We don't buy businesses with much thought of world trends, but we do think about businesses subject to foreign competition, with high labor content and a product that can be shipped in. I bought into an airline [US Air] with high seat-mile costs of 12 cents. It was protected, but that was before Southwest showed up with 8-cent costs.

We learned about foreign labor competition in our shoe business. It reminds me of Will Rogers, who said he didn't think man should have to learn easy lessons in such a hard fashion. You should be able to learn not to pee on an electrified fence without actually trying it.

It's not as easy as it looks to buy these big positions. When we were buying Coca-Cola, we bought every share we could - we bought 30-40% of the volume, yet it still took us a long time to accumulate our position. However, we like it better when we have these problems now than when we didn't earlier. Buffett: We usually feel we can buy 20% of the daily volume and not move the market too much. That means if we want to buy $5 billion, we have to wait for $25 billion to trade and not a lot of stocks trade that much.

I don't think the railroad industry will be a lot more exciting, but the competitive position of the railroads has improved somewhat since 20 years ago. There's been progress on labor issues and an improved competitive position vis-à-vis truckers. Higher oil prices hurt railroads, but hurt truckers more by a factor of four. What was a terrible business 30 years ago, operating under heavy regulation, has become decent and could be better over time. But it will never be a fabulous business - it's too capital intensive.

I'm not sure who we sold our silver too, but whoever bought it was a lot smarter than I was. I bought it too early and sold it too early, but other than that it was a perfect investment. [Laughter] Charlie had nothing to do with it - it was all me.

We would not necessarily view metals investing as protection against inflation. The best protection is your own earnings power, whether the currency is in seashells or paper money. A first-class surgeon or teacher will do alright in terms of commanding the earning power of other people. The second best protection is owning a wonderful business, not metals or raw materials or minerals. The truth is, if you own Coca-Cola or Snickers bars or anything that people are going to want to give a portion of their current income to keep getting, and it has low capital-investment requirements, that's the best investment you can possibly have in an inflationary world.

We normally don't want to do deals with partners. If we like a deal, we want to do it all. We have a lot of money, so we don't need a money partner. As for a knowledge partner, we don't want to do a deal where we're relying on someone else.

As for what could trigger this and when, who knows? Who had any idea that shooting an archduke would start Word War I?

Munger: The accounting being enormously deficient contributes to the risk. If you get paid enormous bonuses based on profits that don't exist, you'll keep going. What makes it difficult [to stop] is that most of the accounting profession doesn't realize how stupidly it's behaving. One person told me the accounting is better because positions are marked to market and said, "Don't you want real-time information?" I replied that if you can mark to market to report any level of profits you want, you'll get terrible human behavior. The person replied, "You just don't understand accounting."

Buffett: When we went to close out Gen Re's derivatives book, we took a $400 million loss on a portfolio that was "marked to market" by the prior management and auditors - and I'm not criticizing our auditor. Any auditor would have said the same. I wish I could have sold to the auditors instead!

Take a dry cleaning business that owes $15. Their books show a $15 accounts payable and the other company shows an offsetting $15 accounts receivable. But there are only four big auditing firms, so in many cases, if they're auditing my side, the same firm may be valuing or attesting to the value of what's on the books of the person on the other side. I will guarantee you that if you add up the marks on both sides, they don't add up to zero. We have 60 or more derivative contracts, and I'll bet the other side isn't valuing them like we are. I have no reason to mark the value up - we don't get paid for that. If I value it at $1 million on our side, the other side should be marking it at minus $1 million, but I guarantee the numbers are widely different. Auditors should check both sides of derivative trades and the "marks" should sum to about zero. They don't. Munger: As sure as God made little green apples, this will cause a lot of trouble. This will go on and on, but eventually will cause a big dénouement.

Buffett: If you take the percentage of bonds and stocks held by people who could change their minds tomorrow based on what the Fed does, etc., it's gone up a lot. I call it an electronic herd, who change what they do every day or minute. The turnover of stocks has gone from 40% to over 100%, and the turnover of bonds has gone up dramatically as well. There's nothing evil about it, but it's a different game and there are consequences. If you're trying to beat the other fellow on a day-to-day basis and you're watching the news or the other fellow, and you think he's going to push the sell button, you'll try to push it quicker. When Charlie and I were at Salomon, they talked about 5- or 6-sigma events, but that doesn't mean anything when you're talking about real markets and human behavior. Look at what happened in 1998 and in 2002. You'll see it when people try to beat the markets day by day.

Munger: When people talk about sigmas in terms of disaster probabilities in markets, they're crazy. They think probabilities in markets are Gaussian distributions, because it's easy to compute and teach, but if you think Gaussian distributions apply to markets, then you must believe in the tooth fairy. It reminds me of when I asked a doctor at a medical school why he was still teaching an outdated procedure and he replied, "It's easier to teach."

History doesn't repeat itself, but it rhymes. We'll have something that rhymes.

It's in the national interest to give loans to the deserving poor. But the moment you give loans to the undeserving poor or the stretched rich, you run into trouble. I don't see how people did it and still shaved in the morning, because looking back at them was a face that was evil and stupid.

It's in the national interest to give loans to the deserving poor. But the moment you give loans to the undeserving poor or the stretched rich, you run into trouble. I don't see how people did it and still shaved in the morning, because looking back at them was a face that was evil and stupid.

It will be at least a couple of years before real estate recovers. In some areas of the country, the [housing] inventory overhang is huge. The people who were counting on flipping the homes are going to get flipped, but in a different way.

We think the most logical fund is like the one we manage at Berkshire, where we can do anything, but are not compelled to do anything. We would not limit ourselves to one area of the market - we buy stocks, futures, bonds, currencies, entire businesses, etc. We think it's a mistake to shrink the universe of opportunities. There's no form that produces good investment results, be it hedge funds, private equity funds or mutual funds. What makes the difference is whether the people running them know their strengths and weaknesses and play when it is to their advantage and do nothing when it is not.

Compensation is not rocket science. We have very simple systems to compensate our people. We don't make it complicated. We don't pay them for things that are happening that they have nothing to do with.

If oil goes from $30 to $60, there's no reason to pay [an oil company executive] for that. If they have low finding costs, which they can control, I'd pay them like crazy for that. That is the job you hire them for. To hand them huge checks for something they have no control over is crazy, and it's equally crazy to penalize them if oil prices go down. If oil prices went down and my CEO had low finding costs, we'd pay him like crazy.

It reminds me of the joke about why the woman told the census taker that the man of the house was in jail for embezzlement. Because she didn't want to admit that her dad was a comp consultant.

For a long time, most directors were sort of like potted plants. Management had its agenda and didn't want input on major matters and Charlie and I can testify that we've had very little success in influencing big issues. If someone's spent 20-30 years rising to become CEO, they don't want a board telling them what to do. It's changed a little bit today in terms of process.

When a significant deal comes along, it's a chance for the board to weigh in and discuss the economics of what's going on. But the CEO doesn't bring a deal unless he wants it done and so he stacks the deck.

Buffett: In most stock deals, the CEO thinks about what he's getting, but not what he's giving. You have to make sure you think about this. I can't ever think of a discussion [when I was on a board] of weighing what you're giving away vs. what you're getting in a stock deal. If more value is being given away, then don't do it! When I gave away 2% of Berkshire to buy Dexter shoes, it was one of the dumbest things ever. Not 2% of Berkshire then, but 2% of Berkshire today! Munger: Fortunately, you've made some good decisions. Buffett: Or half of you wouldn't be here. It gets swept under the rug.

We owned a bank that went to acquire a smaller bank. The CEO of the smaller bank held out for a high price and various terms and conditions and, because he was taking stock, had one last condition for the acquiring bank: "Promise never to do a deal this dumb in the future."

It's a real owners board. Every board member had a significant percentage of his net worth in the company and every decision was made for business reasons.

But every now and then, things really get out of whack. But the gradations in between are too tough. If you own great businesses, you should just hold on most of the time, maybe sell if the valuations get extremely high and buy more if they get really cheap like in the early 1970s.

The shorts generally have a tougher time of it in this world. More people are bullish on stocks. It's a tough way to make a living. It's very easy to spot a phony stock or a heavily promoted stock, but it's hard to say when it will turn. If it's trading at five times its intrinsic value, there's no reason it can't trade at ten times.

"We own one currency position right now that will surprise you - we'll tell you about it next year." I wonder what that is. Hope I remember it next year to find it out.

We favor businesses where we really think we know the answer. If we think the business's competitive position is shaky, we won't try to compensate with price. We want to buy a great business, defined as having a high return on capital for a long period of time, where we think management will treat us right. We like to buy at 40 cents on the dollar, but will pay a lot closer to $1 on the dollar for a great business.

Munger: Margin of safety means getting more value than you're paying. There are many ways to get value. It's high school algebra; if you can't do this, then don't invest.

Buffett: Let's say you decide you want to buy a farm and you make calculations that you can make $70/acre as the owner. How much will you pay [per acre for that farm]? Do you assume agriculture will get better so you can increase yields? Do you assume prices will go up? You might decide you wanted a 7% return, so you'd pay $1,000/acre. If it's for sale at $800, you buy, but if it's at $1,200, you don't. Buffett: If you're going to buy a farm, you'd say, "I bought it to earn $X growing soybeans." It wouldn't be based on what you saw on TV or what a friend said. It's the same with stocks. Take out a yellow pad and say, "If I'm going to buy GM at $30, it has 600 million shares, so I'm paying $18 billion," and answer the question, why? If you can't answer that, you're not subjecting it to business tests.

We have to understand the competitive position and dynamics of the business and look out into the future. With some businesses, you can't. The math of investing was set out by Aesop in 600 BC: a bird in the hand is worth two in the bush. We ask ourselves how certain we are about birds in the bush. Are there really two? Might there be more? We simply choose which bushes we want to buy from in the future.

Munger: We have no system for estimating the correct value of all businesses. We put almost all in the "too hard" pile and sift through a few easy ones. Buffett: We know how to recognize and step over one-foot bars and recognize and avoid seven-foot bars.

I think you should read everything you can. In my case, by the age of 10, I'd read every book in the Omaha public library about investing, some twice. You need to fill your mind with various competing thoughts and decide which make sense. Then you have to jump in the water - take a small amount of money and do it yourself. Investing on paper is like reading a romance novel vs. doing something else. [Laughter] You'll soon find out whether you like it. The earlier you start, the better.

I remain big on reading everything in sight. And when you get the opportunity to meet someone like Lorimer Davidson, as I did, jump at it. I probably learned more in that four hours than in almost any course in college or business school.

Buffett: Charlie and I have made money in a lot of different ways, some of which we didn't anticipate 30-40 years ago. You can't have a defined roadmap, but you can have a reservoir of thinking, looking at markets in different places, different securities, etc. The key is that we knew what we didn't know. We just kept looking. We knew during the Long Term Capital Management crisis that there would be a lot of opportunities, so we just had to read and think eight to ten hours a day. We needed a reservoir of experience. We won't spot every one, though - we've missed all kinds of things.

But you need something in the way you're programmed so you don't lose a lot of money. Our best ideas haven't done better than others' best ideas, but we've lost less. We've never gone two steps forward and then one step back - maybe just a fraction of a step back.

Munger: And of course the place to look when you're young is the inefficient markets. You shouldn't be trying to guess if one drug company is going to have a better pipeline than another.

Munger: And of course the place to look when you're young is the inefficient markets. You shouldn't be trying to guess if one drug company is going to have a better pipeline than another.

Munger: And of course the place to look when you're young is the inefficient markets. You shouldn't be trying to guess if one drug company is going to have a better pipeline than another.

But you need something in the way you're programmed so you don't lose a lot of money. Our best ideas haven't done better than others' best ideas, but we've lost less. We've never gone tw

But you need something in the way you're programmed so you don't lose a lot of money. Our best ideas haven't done better than others' best ideas, but we've lost less. We've never gone two steps forward and then one step back - maybe just a fraction of a step back.

course the place to look when you're young is the inefficient markets.

If I were working with a very small sum - you all should hope this doesn't happen - I'd be doing almost entirely different things than I do. Your universe expands - there are thousands of times as many options if you're investing $10,000 rather than $100 billion, other than buying entire businesses. You can earn very high returns with very small amounts of money. Everyone can't do it, but if you know what you're doing, you can do it. We cannot earn phenomenal returns putting $3, $4 or $5 billion in a stock. It won't work - it's not even close.

Munger: Two things matter: if the quality of the business is good enough, it can carry bad management. The reverse isn't true, though. It's very rare for a great manager to take over a bad business, say the textile business, and make it great. You shouldn't look for Warrens.

I get letters all the time from people who have been taken advantage of in financial transactions. It's sad. A lot isn't fraud - just the frictional costs and the baloney. Charlie and I have had very good luck buying businesses and putting our trust in people - it's been overwhelmingly good, but we filter out a lot of people. People give themselves away and maybe it's an advantage being around awhile and seeing how people give themselves away by what they talk about and what's important and not important to them.

Buffett: When they make certain kinds of comments, what they laugh about, if they say "it's so easy." It's not so easy. We rule out people 90% of the time. Maybe we're wrong sometimes, but what's important is the ones we let in.

I couldn't have told you which of the three would be the best, but the one thing I was sure of was that they were going to be sensational stewards of money and do what was right for clients rather then try to make 2x in commissions in a given year. Anytime someone who takes what I think is an unfair fee structure because they can get it, I rule them out.

Munger: The concept of a hurdle rate makes nothing but sense, but a lot of people using this make terrible errors. I don't think there's any substitute for thinking about a whole lot of investment options and thinking about the returns from each. The trouble isn't that we don't have one [a hurdle rate] - we sort of do - but it interferes with logical comparison. If I know I have something that yields 8% for sure, and something else came along at 7%, I'd reject it instantly. It's like the mail-order-bride firm offering a bride who has AIDS - I don't need to waste a moment considering it. Everything is a function of opportunity cost.

Buffett: I've been on 19 boards and seen a zillion presentations projecting a certain IRR [internal rate of return]. If the boards had burned them all, they'd have been better off. The IRR is based on what the CEO wants. The numbers are made up. Munger: I have a young friend who sells private partnership interests to investors, and it's hard to get returns in that field. I asked him, "What returns do you tell them you can get?" He said "20%." I said, "How did you come up with that number?" He said, "If I told them anything lower, they wouldn't give me the money." Buffett: There's no one in the world who can earn 20% on big money. It's amazing how gullible pension funds and other investors are. They want it so badly that they'll believe even total nonsense.

Volatility does not measure risk. The problem is that the people who have written about and taught volatility do not understand risk. Beta is nice and mathematical, but it's wrong. Past volatility does not determine risk. Take farmland here in Nebraska: the price of land went from $2,000 to $600 per acre. The beta of farms went way up, so according to standard economic theory, I was taking more risk buying at $600. Most people would know that's nonsense because farms aren't traded. But stocks are traded and jiggle around and so people who study markets translate past volatility into all kinds of measures of risk. The whole concept of volatility is useful for people whose career is teaching, but useless to us. Risk comes from the nature of certain kinds of businesses by the simple economics of the business, and from not knowing what you're doing. If you understand the economics and you know the people, then you're not taking much risk.

Munger: We'd argue that what's taught is at least 50% twaddle, but these people have high IQs. We recognized early on that very smart people do very dumb things, and we wanted to know why and who, so we could avoid them.

Buffett: We are willing to lose $6 billion in one catastrophe, but our insurance business over time is not very risky. If you own a roulette wheel, you sometimes have to pay 35-to-1, but that's okay. We would love to own a lot of roulette wheels.

Choosing your heroes is very important. Associate well,

I want to give the claim checks to someone who can follow generally what I would do myself if I were to do it myself.

What are the best ways for a 10-year-old to earn money? That was a subject I gave a lot of thought to when I was 10. You're probably a little young to deliver papers. I got half my capital from that - I liked it because I could do it by myself. You can do it when you're 12 or 13. I tried 20 different businesses by the time I got out of high school. The best was a pinball-machine business, but I wouldn't recommend it now.

I saw a study that correlated business success with a range of variables like grades, parents, whether one attended business school - and they found it correlated best with the age at which you first started in business. You see this in athletics and music as well.

Look for what people don't want to do for themselves. Ask around, see what other kids have done.

Munger: When I was young, I read The Richest Man in Babylon, which said to under-spend your income and invest the difference. Lo and behold, I did this and it worked. I got the idea to add a mental compound interest too, so I decided I would sell myself the best hour of the day to improving my own mind, and the world could buy the rest of the time. It sounds selfish, but it worked.

I was worried about Charlie's hearing so I asked a doctor about it. He said to test Charlie's hearing by standing across the room and saying something. So I stood at the opposite side of the room and said, "I think we ought to buy GM at $30." I got no reaction so I moved halfway across the room and said it again. Still no answer, so I went very close to him and said it and Charlie replied, "For the third time, yes!"

Munger: It's too tough. We can't solve that one. We try to look for easy problems. We don't try tough things. Sometimes life hands you a very tough -30- problem you have to wrestle with - not financial problems for us, but personal ones.

I think the idea of running vehicles on corn is one of the dumbest ideas I've ever seen. Governments, under pressure, do crazy things, but this is among the craziest. Raise the cost of food so you can run these autos around? You use up just about as much hydrocarbons making ethanol as it produces, and its cost doesn't even factor in the permanent loss of topsoil. I love Nebraska to the core, but this was not my home state's finest moment.

Buffett: I believe the odds are good that global warming is serious. There's enough evidence that it would be foolish to say there's a 99% chance it isn't a problem. In this case, you have to build the ark before the rains come. If you have to make a mistake, err on the side of the planet. Build a margin of safety to take care of the only planet we have.

I think Planned Parenthood is a terrific organization. I really think it's too bad that for millennia women, not only in the U.S. but over the world, have involuntarily had forced upon them the bearing of babies, generally by governments run by men.

I think Planned Parenthood is a terrific organization. I really think it's too bad that for millennia women, not only in the U.S. but over the world, have involuntarily had forced upon them the bearing of babies, generally by governments run by men. [Applause] I think it's an important issue that doesn't have a natural funding constituency - it's not like putting your name on a hospital. I think if we'd had a Supreme Court with nine women on it from the beginning, I don't think a question like yours would even be asked. I think it's wonderful that women can make reproductive choices. I hope you'll respect my opinion as I do yours. [More applause]

I think Planned Parenthood is a terrific organization. I really think it's too bad that for millennia women, not only in the U.S. but over the world, have involuntarily had forced upon them the bearing of babies, generally by governments run by men. [Applause] I think it's an important issue that doesn't have a natural funding constituency - it's not like putting your name on a hospital. I think if we'd had a Supreme Court with nine women on it from the beginning, I don't think a question like yours would even be asked. I think it's wonderful that women can make reproductive choices. I hope you'll respect my opinion as I do yours. [More applause]